Rigour – a poor substitute for relevance and realism

The mathematization of economics since WW II has made mainstream – neoclassical – economists more or less obsessed with formal, deductive-axiomatic models. Confronted with the critique that they do not solve real problems, they often react as Saint-Exupéry‘s Great Geographer, who, in response to the questions posed by The Little Prince, says that he is too occupied with his scientific work to be be able to say anything about reality. Confronting economic theory’s lack of relevance and ability to tackle real probems, one retreats into the wonderful world of economic models. One goes into the “shack of tools” – as my old mentor Erik Dahmén used to say – and stays there. While the economic problems in the world around us steadily increase, one is rather happily playing along with the latest toys in the mathematical toolbox.

Paul Krugman has been having similar critical thoughts on our “queen of social science”. In a piece called Irregular Economics he writes:

Why, exactly, are we to have such faith in “regular economics”? What is the compelling evidence that the vision of a competitive, efficient economy allocating resources to the right uses is actually a good description of the world we live in?

I mean, it’s a lovely model, and one I, like everyone else in economics, use a lot. But I would not have said that it’s a model backed by lots of evidence. We do know that demand curves generally slope down; it’s a lot harder to give good examples of supply curves that slope up (as a textbook author, believe me, I’ve looked); and it’s a very long way from there to the vision of Pareto efficiency and all that which Barro wants us to take as the true economics. Realistically, imperfect competition, market failure, and more are everywhere.

Meanwhile, there’s actually a lot of evidence for a broadly Keynesian view of the world. Not, to be fair, for fiscal policy, mainly because clean fiscal experiments are rare. But there’s huge evidence for sticky prices, lots of evidence that monetary shocks have real effects — and it’s hard to produce a coherent model in which that’s true that doesn’t also leave room for fiscal policy.

In short, there’s no reason at all to consider microeconomics the “real” economics and macroeconomics some kind of flaky impostor. Yes, micro is a lot more rigorous — but if it’s rigorously wrong, who cares?

Instead of making the model the message, I think we are better served by economists who more than anything else try to contribute to solving real problems. And then the motto of John Maynard Keynes is more valid than ever:

I’ve come to think of many – I presume neoclassical – economists I read on the blogosphere as “Sat Nav” economists. You’ve heard the stories, guy drives into stream because he was paying more attention to his Sat Nav rather than the real world. It seem to me that many economist’s need to download the “How banking works – Points of interest” extension..

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